December, 2007
A Financial Action Plan for the Future
December, 2007
A Financial Action Plan for the Future
In 1955, the life expectancy of the average American was 69.6 years. By 1995, it was 75.8 years. Ten years later, life expectancy reached a new high of 77.9 years, according to the latest information from the Centers for Disease Control and Prevention. While certainly positive, these statistics may only add to the pressure many people already feel about their lack of retirement savings.
Unless you are among the fortunate few who can count on receiving a generous pension, you'll want to start preparing for life without a regular paycheck well in advance of your retirement date. Even if you intend to continue working indefinitely, you still should be ready for the possibility that ill health or other unexpected circumstances could force you into retirement.
Social Security - A Safety Net, Not a Solution People do get by on Social Security, but not comfortably. The average retirement benefit in 2007 is $1,044 a month ($12,528 a year) for individuals and $1,713 a month ($20,556 a year) for married couples. The maximum benefit for a worker retiring at full retirement age in 2007 is $2,116 a month ($25,392 a year). Clearly, Social Security benefits standing alone are enough to support only a modest retirement lifestyle.
Home Equity - Your Ace in the Hole? After years of mortgage payments and price appreciation, many people have substantial equity in their homes by the time they retire. What about using home equity to help finance your retirement? It's a possibility, but to get your hands on that cash, you'll either have to borrow against the equity or sell your home.
Taking on additional debt just before retirement usually isn't smart. While you'd receive some quick cash, the loan would have to be repaid. And selling would involve moving. Is that something you'd be willing to do? If selling seems like a viable option, be sure to gauge how much equity you're likely to have left over after you get a new place. It may be less than you think.
Your Action Plan There's really no way around it. Bottom line, saving and investing are critical to retirement planning. Sitting down with us to discuss your financial situation could be what it takes to get your retirement planning in gear.
The American Time Use Survey, an annual study sponsored by the U.S. Bureau of Labor Statistics, looks at what activities people engage in during the day and how much time they spend on those activities. How does your average day compare?
Household activities. 84% of women and 64% of men spent some time during an average day performing household activities. On the days they did household activities, women spent an average of 2.7 hours and men spent 2.1 hours.
Work. The average workday among employed individuals was 7.6 hours. And 21% of employees did some or all of their work at home.
Leisure and sports activities. On an average day, most people (96%) engaged in some sort of leisure activities, such as watching TV, socializing, participating in sports, or exercising. Average time spent on these activities: about 5 hours.
Sleep. The average number of hours devoted to sleeping: 8.6.
*All statistics are from the 2006 survey and refer to persons age 15 and over.
Financial statements prepared using generally accepted accounting principles (GAAP) must now reflect new accounting guidance provided by the Financial Accounting Standards Board (FASB) in FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN 48 is not limited to large companies. Smaller companies that need GAAP financial statements to provide to lenders, insurers, and investors or for other purposes will also have to implement the concepts described in FIN 48 with the assistance of their CPAs.
Identity The first step in applying FIN 48 is to identify a company's tax positions. Basically, anything that impacts the amount of federal, state, and local income taxes a company pays is considered a tax position, including determinations regarding the deductibility of expenses, the taxability of income, and even the states in which tax return filings are required.
Analyze FIN 48 says that the effect of a tax position can be reached in the financial statements only if it is more likely than not that the position will be sustained upon audit by the taxing authorities. "More likely than not" means a greater than 50% chance, and it should be assumed that tax audits will take place.
Measure Once tax positions are identified and analyzed, the question turns to measurement. Here again, a more-likely-than-not threshold comes into play. The amount to be recorded in the statements is the largest amount of the tax benefit from the position that would more likely than not be realized upon ultimate settlement.
When there is a difference between the tax benefit taken on a return and the benefit recognized in the financial statements, the difference is considered an "unrecognized tax benefit." FIN 48 requires certain footnote disclosures, including a table reconciling total unrecognized tax benefits at the beginning and end of the reporting period.
Effective Date The guidance is effective for fiscal years beginning after December 15, 006. As a result, statements for the 2007 calendar year are affected.
"Deductions are a matter of legislative grace, and the taxpayer has the burden to prove he or she is entitled to any deduction claimed." This principle has been reiterated in many a court case over the years, and it's one to keep in mind as the 2007 filing season approaches.
Lack of proof was the reason the Tax Court recently threw out a large part of a couple's claimed deductions for charitable contributions and employee business expenses. Here are some of the points made in the case.
Cash contributions. Taxpayers should keep receipts, canceled checks, or other reliable written records showing the name of the recipient organization and the date and amount of each contribution.
Donated clothing. Receipts should list the specific items donated, not just the number of bags. Taxpayers also should have evidence supporting the estimated value of the donated clothing.
Cell phone expenses If a phone is used for both business and personal purposes, no part of a flat fee paid for the phone is deductible because the fee would be incurred even if the phone wasn't used for business. To deduct additional charges related to business use, taxpayers need records showing the amount, time and place, and business purpose of the expense, as well as their business relationship to the parties contacted.
Business auto expenses If the IRS's standard mileage rate is used to calculate the deduction, substantiation is still required for the actual mileage, the time, and the business purpose of each use.
Small businesses play a large role in the U.S. economy. Here are some figures to prove it.
According to the Small Business Administration's Office of Advocacy, small businesses*:
Other high numbers are not as exciting. The cost of complying with federal regulations, for example, is also higher for small businesses. Very small firms (those with bewer than 20 employees) pay $7,647 per employee, 45% more than firms with 500 or more employees.
* Independent businesses with fewer than 500 employees.
Ready or not, Web 2.0 is here. Is it just another fleeting technology trend that will be passe by next week? Does it have any bearing on your business?
An Evolutionary Step Web 2.0 isn't a different version of the Internet or a software upgrade - it's a conceptual term. It refers to a new generation of user interactivity brought about by Internet-based software applications. With the problem of software compatibility eliminated, people can interact directly with websites and other users over the Internet.
Web 2.0 technologies, such as blogging, podcasts, RSS feeds, instant messaging, and social networking, allow large groups of people to communicate, collaorate, and exchange of information. As a result, the Internet has been transformed from a static reservoir of content into a fluid, dynamic platform. The changes are real - and they could have implications for your business.
Reach Out and Blog Someone One change is that your customers and clients now have a very public voice. Anyone can write a blog (short for web log) and post it on the Internet for others to read. As a result, companies no longer control their own messages. Blogs about businesses - especially negative ones - can have a considerable impact.
The blogosphere gives you a new voice, too. Posting blogs gives you an opportunity to share your knowledge and business savvy and establish yourself as an expert. Plus, you can embed links in your blogs that direct readers to pages on your website. You can also use podcasts, video clips, and RSS feeds to build up your reputation as an innovator and leader in your field.
The Cost Factor Low cost is another hallmark of Web 2.0 technologies. When the software you're using resides on the Internet, you don't have the expense of installing programs and running upgrades on all your PCs. In addition to the new applications already mentioned, you can also find traditional "enterprise" applications for your business that are Internet-based and incorporate Web 2.0 tools.
Li had been thinking of starting a clothing distribution business for quite a while, but was unable to secure enough financing. Then he met up with a former college classmate who suggested a joint venture.
Li's friend Adam had seen Li's business plan and was seriously interested in investing. The two sat down to discuss the possibilities and quickly decided that a profit sharing arrangement with Adam as the capital partner and Li as the working or "sweat-equity" partner would be best. Then it was time to work out the details.
The first thing they agreed on was Li's annual salary. Then they discussed his ownership share in the company. Sometimes, the working partner's stake in the company is vested over several years, starting at a low percentage and then increasing annually to a predetermined maximum amount. Adam offered Li a 25% ownership stake. As an additional incentive, the agreement included a bonus for Li: an additional 5% ownership share in years when profits exceeded 25%.
Although neither partner could foresee a split-up, they included terms in their agreement that would allow one or the other to get out of the business. Their agreement also prohibited the partners from loaning any of the business's money and from offering shares to other investors.
This is just one example of how this type of partnership could be structured. If you're considering a joint venture and would like to discuss your options, we'd be happy to meet with you at your convenience.
Less than half (43%) of the small businesses polled by the American Red Cross in a national survey feel prepared for a one-week disruption of their businesses due to a disaster. However, many of them have taken some steps to prepare, including developing employee phone lists (86%), purchasing insurance for business disruption or damage (80%), and securing business files and records (75%).
The $250 deduction for educators' classroom costs (books, supplies, equipment, software) is again available for 2007. Eligible educators include individuals who worked at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide in a public or private elementary or secondary school.
The federal government expects to put a new five dollar bill incorporating state-of-the-art security features into circulation next spring.
Businesses will have until December 31, 2008, to bring documents into compliance with the final tax regulations under Code Section 409A regarding nonqualified deferred compensation plans. However, plans must be operated in accordance with IRS requirements on and after January 1, 2008.
Question: How long should I keep records of the employment taxes my business pays?
Answer: Employers should keep employment-tax records for at least four years after (1) the due date of the tax for the return period to which the records relate or (2) the date the tax was paid, whichever is later.
Question: My son, a licensed practical nurse, is planning to take courses to become a physician's assistant. Will he be able to deduct his education expenses?
Answer: Although both occupations are in the same general field of health care, the job duties, functions, and responsibilities of a physician's assistant are different from those of a licensed practical nurse. Because the courses will prepare your son to perform a different job, he expenses won't be deductible. (Despite this general rule, income-eligible taxpayers may deduct a limited amount of higher education expenses in 2007. Unless it's extended, this tuition deduction won't be available after 2007).